Hungary makes U-turn, commits to 2011 budget cuts

Published August 1, 2011

Reuters

By Krisztina Than and Gergely Szakacs

BUDAPEST, Sept 8 (Reuters) - Hungary's government onWednesday committed to cutting the budget deficit below 3percent of GDP next year as it appeared to bow to European Unionand market pressure to stick with deficit cuts.

Economy Minister Gyorgy Matolcsy told a news conference thatthe European Union would give all its support to Hungary inmaking this deficit cut from a targeted 3.8 percent this year,and would not support a higher than 3 percent deficit in 2011.

Matolcsy's announcement on Wednesday, the day after ameeting of EU finance ministers in Brussels, marked a U-turn inthe Hungarian centre-right Fidesz government's plans, which hasso far signalled it wanted to seek some fiscal leeway next yearto boost the ailing economy.

The government confounded markets in July when its talkswith the International Monetary Fund and EU collapsed, and mostanalysts had said the EU was unlikely to allow Hungary to loosenthe fiscal grip next year at a time when the bloc is strugglingwith deep deficit and debt problems.

Hungary is also highly vulnerable to negative shifts inglobal market sentiment due to its high public debt and a largestock of Swiss franc loans held by households and corporates.

"The government today made a very important decision, namelyit has approved the economy minister's proposal that Hungary in2011 undertakes to cut its budget deficit below 3 percent,"Matolcsy said.

"The government has authorised the economy ministry toprepare the first draft of the 2011 budget based on this."

Matolcsy said there were five conditions for Hungary to beable to cut its deficit below 3 percent next year which includethat this year's deficit should meet the target, the economyshould grow by 2.5-3.0 percent next year and the bank tax shouldremain in place.

He also said the government should start radical statereform, cutting spending in that area by 100-200 billion forintsnext year, and put the finances of state-owned firms in order.

The central bank sees 2.8 percent growth next year.

"The European Union gives all its support to a below 3percent deficit in 2011, but it does not (support) a higherdeficit than that...this became quite obvious at the taskforce's meeting and at yesterday's finance ministers' breakfastand at the Ecofin meeting," Matolcsy said.

Matolcsy also said Hungary will continue to fight to be ableto account the costs of its pension reform in its deficit anddebt numbers. He said a decision on this initiative, supportedby nine countries, could be expected at the end of October butthe government did not reckon with the impact of a change inrules when it decided to cut the 2011 deficit below 3 percent.

"We are awaiting the Ecofin's favourable decision on theaccounting of private pension funds, but now we do not calculatewith that, we do not calculate with that in the deficit targetof below 3 percent," Matolcsy said.

He reiterated that Hungary did not want to sign a new IMFfinancing deal after the current one expires in October.

POSITIVE SHIFT IN POLICY

Analysts said the government's commitment to a below 3percent deficit next year was positive for markets and theforint currency which has seen increased volatility in the pastweeks due to shifts in global sentiment, and due to a lack ofclarity over the government's plans.

"These remarks were very positive, they basically declaredwhat the market has been expecting from (the government) allalong, that they reduce the budget deficit next year to thelevel expected by the IMF and the EU," said Janos Samu atConcorde.

Most analysts expected the government to lay down its cardsand put forward a credible budget only after municipal electionson October 3 which ruling Fidesz hopes to win, but the cabinetbowed to European Union pressure earlier than that.

But analysts warned the devil will be in the details of howthe government aimed to cut the deficit, and the measures wouldhave to be credible to restore confidence in Hungarian policy.

"The key thing is that they want to keep the deficit track(promised earlier to the EU), and the question now is to whatextent markets will believe that," added Zsolt Kondrat at MKB.

The Swiss franc<CHFHUF=> rose to record highs past 226versus the forint and the forint also fell versus the euroearlier on Wednesday but it regained some ground <EURHUF=>partly after Matolcsy's comments, also lifted by a rebound ofthe euro.

Matolcsy said the government would be able to keep the 2010budget deficit on track thanks to the bank tax which is expectedto yield 200 billion forints both this year and next year.

The other condition for meeting the 2010 target was to keepa 120 billion forints spending reduction on track, he said.

Hungary's budget deficit hit 124 percent of the full-yeartarget by the end of August.

"The main expectation of Hungary in the EU, in financialmarkets and everywhere is that it pursues a predictable,reliable budget policy -- also starting structural reforms --targeting a stable deficit below 3 percent, and we will do so,"Matolcsy said.

"In the framework of state reform, we will have to decideabout 100-200 billion forints to be saved within the sphere ofpublic administration expenditures (in 2011)," he added.

For analysts comments please click on [ID:nLDE67U1GE]

(Reporting by Krisztina Than and Gergely Szakacs; Editing byRon Askew)